When it comes to investing or trading cryptocurrencies, the main risk that comes with it is the current market volatility. If you are using digital wallets to store cryptocurrencies, you are exposed to eminent security risks. The current value of cryptocurrencies is also affected by international events. The huge profit factor of cryptocurrencies can be attributed to the extremely large spikes or drops in the stock price. The market volatility for cryptocurrency is very high, which makes it a risky investment for people thinking about investing in this market.
There have been several instances where hackers have found their way into digital wallets and made trade exchanges. A recent hack in November 2017 on Tether caused theft of over $30.9 million tokens in a malicious attack. Back in August 2016, a hacker managed to steal over $72 million worth of Bitcoin from the Bitfinex exchange. There are high periods of volatility around the decline of national currencies. For example, during Brexit, the pound went down. This caused a spike in the Bitcoin value.
What is a digital wallet?
When trading cryptocurrency, you will come across the term ‘digital wallet.’ It works the same way as your physical wallet which stores fiat currency, but the digital wallet is highly coded to help you to store anything from cryptocurrencies to information. These digital wallets are based on the blockchain technology. Many providers provide a form of mobile application, similar to current online banking programs. It does not have a centralized control body such as a bank to regulate the digital wallet.
Similar to cryptocurrencies, digital wallets are based on the blockchain technology. You will come across two main types of digital wallets. The first one is a cold storage wallet which is an offline wallet. When you buy cryptocurrencies, you will get a cryptocurrency address and you can link it to your digital address which is your wallet. Then, you can store your cryptocurrency offline on a disc.
Another type of wallet is called the hot wallet. It is commonly used through mobile applications. It is also known as the online wallet. Generally, the hot wallet is more vulnerable towards hacking but cold wallets have also been lost because people accidentally threw out their hard disk or the hard disk simply became inoperable.
Cryptocurrency regulations in Australia
For Australians that are interested in getting into cryptocurrency trading, there are not many regulations besides the current tax requirements. There is also a government warning issued about Initial Coin Offerings (ICOs). Most of the ICOs issued will be followed by a white paper. This is basically an informative document that highlights certain features of the business plan. This is created to encourage further investment in sales and it also functions to help the Australian Taxation Office to determine the type of investment.
Based on the white paper, the Australian Securities and Investment Commission will assess whether it is a market derivative or a managed investment scheme or an initial public offering (IPO). In terms of tax, cryptocurrencies are treated as an asset, and they are also taxed under the capital gains tax. You will only be taxed if you withdraw it.
Initial Coin Offerings (ICOs)
To put it in short, ICOs function as crowdfunding campaigns which are used to raise money for a prospective cryptocurrency business. Program founders also use ICOs to raise funds before the launch of their products. Essentially, initial coin offerings are used for sending virtual currencies such as Bitcoin or Ethereum to a blockchain project. In return for selling the virtual currency, you will receive digital tokens which are related to the project.
These tokens are used to interact with the project once it has been launched. Furthermore, it can also be used as a type of share in the venture. The only difference it has with a normal share ownership in the real world is that they do not guarantee an ownership stake for the investors in the company or the project itself.
For this reason, the federal government issued a warning to Australians to be wary when they are putting money into ICOs. Many of the recently created startups use ICOs to raise money. Australians are warned against investing in these ICOs because they are classified as highly speculative investments. This means that they are not regulated and you have a high chance of losing your investment. It is essential to understand the risks that come with investing in ICOs. There is also a possibility that these products can be a scam.
So, is cryptocurrency worth it?
Ultimately, this is up to your risk tolerance level. For many critics, they believe that the cryptocurrency market is an area where buyers have to be highly aware of the risks and possibility of losing their investment. The cryptocurrency world is a highly exciting addition to the financial market because it has a huge potential for growth. If you are an investor, you should not invest any money that you can’t afford to lose. Different things can go wrong in the cryptocurrency market with all these new ventures and businesses coming up.
Currently, there is a lot of hype around cryptocurrency, but there are also plenty of speculations and risks being undertaken, especially for newer coins. Many people want to jump into the cryptocurrency market but are unaware of the risks that comes with their choices. Current investors are trying to navigate the market and see what works best. In the long-term, the cryptocurrency market presents an exciting opportunity for investors.
The potential future applications for the blockchain technology and the ventures that can be created holds a large potential that will revolutionize the way businesses are conducted in a world. The technology and the potential that comes from blockchain is undeniable.
In 10 years from now, regardless of whether Bitcoins will continue to exist, the blockchain technology will still exist and will have a large impact on how the economy and businesses operate. Blockchain has the capability of changing the world, regardless of whether you understand the technology. It will take some time for people to start accepting blockchain, but it is a technology that will inevitably change the way we live our life.